Partnerships that Grow U.S. Infrastructure

On May 28, 1937, San Francisco’s iconic Golden Gate Bridge opened to traffic. Built in just over four years during the depths of the Great Depression, the bridge is a monument to engineering prowess and aesthetic achievement. It is also a dramatic demonstration of a way of developing infrastructure in the U.S. that has long been out of fashion, but has begun to reemerge: the use of public-private partnerships (P3s).

Since the 1950s, major public works projects, such as the Eisenhower Interstate Highway System, have been funded largely by the federal government through the traditional “design-bid-build” procurement and development system. Prior to that time, however, and in fact through the greater part of U.S. history, large-scale infrastructure development projects were funded via private investment. Funding for the Golden Gate Bridge, for example, drew on a $35 million commercial loan from a large national bank and four private investment firms. Even earlier, in the 19th century, the railroads were laid via private investments as well. A reliable tax base was simply not available in these earlier times for state and federal governments to draw upon to fund these kinds of projects on their own.

Today, the P3 market is returning to popularity in the U.S., in large part due to three factors: declining tax revenues, shrinking budgets, and a desperate need to repair and expand rapidly deteriorating infrastructure nationwide.

P3’s growing popularity is following a global trend of reliance on public-private partnerships that began in England, spread through Europe, Australia and Canada, and is only now arriving in the United States. If P3 follows a trajectory in the U.S. that is similar to how it has done in Canada, for example – then the potential levels for private investment are enormous.

According to the American Society of Civil Engineers (ASCE), America’s infrastructure currently rates a D + in quality and safety – not very reassuring to anyone who uses bridges, tunnels, flies, or drinks water from the tap.1 For the U.S. to continue its recent efforts to improve the situation (in 2009, the ASCE gave the U.S. an infrastructure grade of D –), over the next five years we will need to spend $1.73 trillion on enhancements to surface transportation, $100 billion for rail, and $134 billion for aviation.2 In addition, the U.S. Environmental Protection Agency (EPA) estimates that the U.S. will need $335 billion to improve the nation’s water infrastructure3 and an additional $298 billion for wastewater infrastructure.4

Obviously, these needs are far too large for the private sector to fund on its own. But the potential for tremendous participation from private funding sources is clearly there.

Currently, 33 states have legislation that enables P3 projects, and it seems likely that more will come on board in the near future.

P3 projects historically have outperformed traditional public procurement projects along two critical parameters: staying on budget and delivery speed. According to a study conducted by Infrastructure Partnerships Australia, from 2000-2007 only 14% of P3 projects went over budget, compared to 45% of traditionally funded projects. And where there were cost overruns, P3 projects averaged 12% over budget, versus 35% for traditional projects. On time-to-completion, P3 projects missed deadlines 10% of the time, versus 18% for traditionally procured projects.5

As the P3 market expands to meet society’s desperate need for improved infrastructure to service America’s burgeoning population and economy, there will be a concomitant shift of risk from the public to the private sector. As Thomas Grandmaison, executive vice president of Construction Casualty and executive sponsor for AIG’s Construction Industry Practice Group, has noted, “All private sector participants will be challenged to accept risk beyond their comfort zone…and a significant portion of that risk will not be transferrable to conventional insurance coverages.”6

While the U.S. has not been in the forefront of the recent global wave of P3 development, it is poised to become the world’s largest P3 market. The opportunities are there in terms of infrastructure needs, and it appears that the public and political will that is necessary to make it happen is rapidly moving into place. If it does, then there may be some new engineering miracles like the Golden Gate Bridge coming your way soon.